Netflix's Worst Nightmare Has Come True

If there were a stock market “hall of fame,” Netflix (NFLX) would be a shoo-in.

Its stock has soared 8,500%+ in the last decade as “streaming” video has caught fire.

Netflix achieved those gains by stealing tens of millions of customers from cable companies. Last year, half of Americans age 22–45 didn’t watch a second of cable TV. And 35 million Americans have dropped cable in the last decade.

Until recently, Netflix was the only real streaming game in town. Not only did it enjoy virtually zero competition. Many of the biggest, most powerful media companies on earth helped Netflix build its business.

Netflix founder Reed Hastings did a lot of things right. But his most genius move was leasing shows and movies that other companies produced.

In the early 2010s, Netflix signed deals with movie and TV makers like Disney and NBC. For a small fee, Netflix bought the rights to air wildly popular content like the Marvel Avengers movies... and hit comedies like The Office and Friends.

In other words, Netflix built its business on the back of other companies’ content. And it worked incredibly well. Netflix now has 149 million subscribers—more than any cable company.

But this world is now gone.

One by one, Netflix’s colossal competitors have woken up. They’re ending their contracts with Netflix, taking back control of their content, and launching their own streaming services that will compete with Netflix.

This is happening right now. Have you heard about Disney’s new streaming service, Disney+? Launching later this year, it’ll be the new home of the world’s most popular movies.

Although Disney is best known for Mickey Mouse, it owns the greatest portfolio of movies ever assembled.

The 3 best-selling movies so far this year are Avengers: Endgame, Captain Marvel, and Aladdin.

The 3 best-selling movies of 2017 were Star Wars: The Last Jedi, Guardians of the Galaxy 2, and Beauty and the Beast.

Disney owns all 3.

Except for the newest ones, all these wildly popular movies are currently on Netflix. By the end of this year, they’ll be removed from Netflix for good. To watch them, you’ll have to get a Disney+ subscription.

Disney+ will cost $6.99/month—or around half the price of Netflix’s most popular subscription.

Netflix’s Best Content Is Being Gutted

Netflix investors should be equally worried about AT&T’s new streaming service that launches in 2020. It’ll cost slightly more than Netflix at $16–17 month.

AT&T is best known as a cell phone company. But its purchase of WarnerMedia in 2018 turned it into a media powerhouse. It owns HBO, the most successful premium TV network ever. HBO continues to pump out all-time hits like The Sopranos, Game of Thrones, and Sex in the City.

Remember, Netflix achieved its incredible success by being first in streaming. It's a true disruptor stock that revolutionized TV. For years it essentially “owned” the mechanism of airing TV and movies over the internet.

Now that others have caught up, the game has changed. Soon customers will have lots of streaming services to choose from. They’ll choose the ones with the best content.

And Netflix is losing its best content!

It’s not just Disney movies that Netflix is losing. Over the next two years its whole library will be gutted.

According to The Wall Street Journal, the most watched show on Netflix is The Office.

Netflix does not own The Office. NBC Universal owns The Office.

NBC Universal is launching its own streaming service and pulling The Office off Netflix for good by the end of next year.

Another extremely popular show on Netflix is Friends.

Friends is owned by WarnerMedia, which, as I mentioned, is now owned by AT&T.

Friends will be pulled off Netflix for good in 2020.

Losing The Office and Friends is bad, but it’s just scratching the surface. According to analytics firm Jumpshot, more than half of Netflix’s 50 most popular shows are owned by companies planning to launch their own streaming services.

Do you see what’s happening here?

Netflix is losing all the best movies and TV shows.

How could this not cripple it?

Netflix sees the writing on the wall, and is spending gobs of money to reinforce its own content library. It spent $12 billion last year, and it expects to spend another $15 billion this year.

It now invests more in content than any other American TV network. But it’s come at a steep cost. To fund its new shows, Netflix is borrowing huge sums of money. Over the past year its debt has shot up 58% to $10.3 billion. For perspective, Netflix earned $1.2 billion in profits last year.

Unfortunately, no matter how much it spends, it can’t hope to compete with Disney or AT&T. Netflix is in an impossibly tough spot.

Can Netflix survive?

Netflix’s market cap is about $165 billion—making it the 30th-biggest publicly traded US company.

It got there through domination of streaming which, as I’ve shown, is a thing of the past.

Going forward it will succeed or fail on the popularity of the TV shows and movies it produces.

Let’s assume it succeeds and creates a ton of content people love. The problem is, companies that produce TV shows and movies are not worth anywhere near $165 billion.

Even wildly successful film studios are worth tens of billions, max. In 2018 Walt Disney studios—which includes iconic brands like Marvel, Star Wars, and Pixar—generated $10 billion in revenue, and $2.98 billion in profit.

Netflix has one big advantage. It has already amassed a giant audience of 149 million paying subscribers. It’s far easier to keep a customer than to get one.

Netflix will survive. But it will shrink. Even in the most generous scenario, within a couple of years I can’t see it being worth more than $100 billion.

That would put its stock price at about $225/share—or about 40% below its current price.

Again, that’s a rosy scenario. Don’t be surprised if Netflix stock gets cut in half, or worse, in the next year or two.